28th Feb 2008 07:01
Aviva PLC28 February 2008 Aviva plc FY07 Part 5 Part 5 of 5 ------------------------------------------------------------------------------------------------------------------------Page 103 Appendix DAnalysis of Assets Disclosure ---------------------------------------------------------------------------------------------------------------------Page 104 1. Key Messages • The quality of AVIVA's balance sheet asset base is strong, as detailed and evidenced in this comprehensive disclosure• Balance sheet assets have been appropriately valued with 83% of assets (including 100% of financial investments) measured at fair value• Except for tax assets and investments in joint ventures and associates (which are equity accounted) the remaining assets are recognised at costs/amortised cost and tested for impairment• Asset valuations have been arrived at using external market parameters - 68% of fair values are calculated based on quoted market prices - a further 31% of fair values are valued using models applying observable market parameters - where applicable fair values have been adjusted for any assets that operate in an illiquid market• The principal asset classes are Debt Securities (£119 billion), Equities (£56 billion), Other Financial Investments (£40 billion) and Loans (£36 billion)• The majority (95%) of debt securities are investment grade (with 1% below investment grade and 4% not rated)• The Group has very limited exposure to Sub-prime RMBS/ABS, Alt A, Wrapped Credit, CDO's and CLO's; whilst typically AAA rated, these investments represent less than 1% of total balance sheet assets and are typically AAA rated• The Groups Loan portfolio continues to perform well with 99.3% of the portfolio neither past due nor impaired• Of the assets specifically attributable to shareholders (as compared to Policyholder and Participating Fund risks), only 5% is held in equities reflecting the equity de-risking programme in the second half of 2007• Equities and other financial investments are principally held to back Policyholder liabilities (in unit-linked and participating funds) and as such reflect policyholder investment mandates 2. Introduction Set against the background of recent volatility in the credit markets, there is an increasing demand for financial institutions to provide additional insight into the quality of assets recognised on the balance sheet. AVIVA has responded to the requests for further information with this extensive special disclosure which evidences the Group's prudent management of its balance sheet. The purpose of this disclosure is to evidence the quality of Aviva's Group's balance sheet assets by providing: • Further detail on the composition of the asset base• Details of the valuation bases used• An analysis of assets to reflect whether the shareholder or policyholder ultimately bears the underlying credit and market risk• Supplementary analysis to evidence asset quality This disclosure focuses on the balance sheet position. To understand the impact of investment returns on the incomestatement it is important to note the following underlying financial dynamics of theBusiness (as reflected in the Proforma reconciliation of Group operating profit to profit before tax - IFRS basis): •Long Term Business - For the life policyholder funds, there is a close matching between most long-term business assets and liabilities - Operating profit is reported based on expected investment returns with consistent allowance for the corresponding expected movements in liabilities - Investment variances and economic assumption changes are reported separately outside of operating profit. The variance for 2007 was +£15 million with favourable movements in the Europe region largely offset by negative effects in the USA and UK •General Insurance and Health Business - Operating profit is calculated based on longer term investment returns - Any short term fluctuations in investment returns (e.g. arising from changes in interest rates or equity market movements) are identified and reported separately - The value of short term fluctuations in investment returns in 2007 was - £184 million, principally driven by movements in equity prices ---------------------------------------------------------------------------------------------------------------------Page 105 3. Total Assets - Shareholder / Policyholder Exposure to Risk Within this disclosure, the Group's total assets have been segmented based on where the market and credit risks are held, according to the following guidelines: Policyholder Assets The Group writes unit-linked business in a number of long-term business operations. In unit-linked business, the policyholder bears the investment risk on the assets in the unit-linked funds, as the policy benefits are directlylinked to the value of the assets in the funds. These assets are managed according to the investment mandates of the funds which are consistent with the expectations of the policyholders. By definition, there is a precise matchbetween the investment assets and the policyholder liabilities, and so the market risk and credit risk lie with policyholders. The shareholders' exposure on this business is limited to the extent that income arising from assetmanagement charges is based on the value of assets in the funds. Participating Fund Assets Some insurance and investment contracts in our long-term businesses contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referredto as participating contracts. The market risk and credit risk in relation to assets held within Participating Funds (including 'with-profit' funds) are shared between policyholders and shareholders in differing proportions. Ingeneral, the risks and rewards of participating funds rests primarily with the policyholders. The assets within Participating Funds cover liabilities for participating insurance contracts and participating investment contracts in addition to other liabilities within the participating funds. Shareholder Assets Assets held within long-term businesses that are not backing unit-linked liabilities or participating funds, directly expose the Shareholders of Aviva to market and credit risks. Likewise, assets held within General Insurance & Health, Fund Management and non-insurance businesses also expose our shareholders to market and credit risks. The Group has established comprehensive risk management policies to monitor and mitigate these risks as outlined in this disclosure. Less Assets of operations Policyholder Participating Shareholder classified as Balance assets fund assets assets Total Assets held for Sale Sheet Total £m £m £m £m £m £mAssetsGoodwill, Acquired value of in-force business and intangible assets - - 6,279 6,279 - 6,279Interests in joint ventures and associates 749 1,675 1,358 3,782 - 3,782Property and equipment - 114 828 942 - 942Investment Property 5,385 7,818 1,874 15,077 - 15,077Loans 347 8,581 27,265 36,193 - 36,193Financial investments Debt securities 15,065 61,549 42,403 119,017 (80) 118,937 Equity securities 27,743 22,826 5,685 56,254 (236) 56,018 Other investments 26,284 11,362 2,767 40,413 - 40,413Reinsurance assets 1,905 999 5,205 8,109 - 8,109Deferred tax assets - - 606 606 (16) 590Current tax assets - - 376 376 - 376Recievables and other financial assets 458 2,206 6,519 9,183 (554) 8,629Deferred acquisition costs and other assets 114 292 4,081 4,487 - 4,487Prepayments and accrued income 181 1,263 1,688 3,132 (146) 2,986Cash and cash equivalents 3,939 5,012 6,919 15,870 (96) 15,774Assets of operations classified as held for sale - - - - - 1,128---------------------------------------------------------------------------------------------------------------------Total assets 82,170 123,697 113,853 319,720 (1,128) 319,720===================================================================================================================== 26% 39% 36% As can be seen from the table above, 36% of assets can be directly attributed to shareholders where the apportionment of assets is predominantly weighted towards debt securities and loans. In comparison equities, investment property and other investments (e.g. unit trusts) are weighted more towards policyholder and participating assets, reflecting the underlying policyholder investment mandates. Note, the remainder of this disclosure is prepared based on gross assets prior to the adjustment for assets of operations classified as held for sale. ----------------------------------------------------------------------------------------------------------------------Page 106 4. Total Assets - Description of Valuation Bases The valuation of the Group's assets have been categorised into four major categories: 1) Fair Value - Fair value is the amount for which an asset can be exchanged between knowledgeable, willing parties in an arm's length transaction; 2) Cost / Amortised Cost - The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition less principal repayments, plus or minus the cumulative amortisation (using theeffective interest method) of any difference between the initial amount and the maturity amount, and less any reduction for impairment or uncollectibility. The cost / amortised cost of a non-financial asset is the amount at which the asset is initially recognised less any cumulative amortisation / depreciation (if applicable), and less any reduction for impairment; 3) Equity Accounted - Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with theGroup's share of that entity's post-acquisition changes to shareholders' funds, is included as an asset in the consolidated balance sheet. The Group's share of their post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Distributions received from the investee reduce the Group's carrying amount of the investment; and 4) Tax Assets - Within the Group's balance sheet, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported separately within the analysis of the Group's assets in the table below. A split of the Group's total assets into these categories is as follows: Cost/ Equity Fair Value Amortised Cost Accounted Tax Assets Total £m £m £m £m £mAssets Goodwill, Acquired value of in-force business and intangible assets - 6,279 - - 6,279Interests in joint ventures and associates - - 3,782 - 3,782Property and equipment 497 445 - - 942Investment Property 15,077 - - - 15,077Loans 18,325 17,868 - - 36,193Financial investments Debt securities 119,017 - - - 119,017 Equity securities 56,254 - - - 56,254 Other investments 40,413 - - - 40,413Reinsurance assets - 8,109 - - 8,109Deferred tax assets - - - 606 606Current tax assets - - - 376 376Receivables and other financial assets - 9,183 - - 9,183Deferred acquisition costs and other assets - 4,487 - - 4,487Prepayments and accrued income - 3,132 - - 3,132Cash and cash equivalents 15,870 - - - 15,870--------------------------------------------------------------------------------------------------------------------Total assets 265,453 49,503 3,782 982 319,720==================================================================================================================== 83.0% 15.5% 1.2% 0.3% As shown in the above table, 83% of the Group's total assets are carried at fair value (inclusive of cash and cash equivalents). With such a significant portion of the Group's total assets carried at fair value, the impact of market risks and credit risks of these assets has been fully reflected within the Group's reported 31 December 2007 financial position. Furthermore, all other assets have been tested for impairment and, in the case of financial assets carried at amortised cost, this has included a specific analysis of the recoverability of the assets by reference to the credit risk of the counterparty. The carrying values of assets on the different valuation bases are analysed in the tables below between Policyholder,Participating Fund and Shareholder Assets respectively. ---------------------------------------------------------------------------------------------------------------------Page 107 Cost/ Equity Fair Value Amortised Cost Accounted Tax Assets Total £m £m £m £m £mAssets - Policyholder assets Goodwill, Acquired value of in-force business and intangible assets - - - - -Interests in joint ventures and associates - - 749 - 749Property and equipment - - - - -Investment Property 5,385 - - - 5,385Loans 100 247 - - 347Financial investments Debt securities 15,065 - - - 15,065 Equity securities 27,743 - - - 27,743 Other investments 26,284 - - - 26,284Reinsurance assets - 1,905 - - 1,905Deferred tax assets - - - - -Current tax assets - - - - -Receivables and other financial assets - 458 - - 458Deferred acquisition costs and other assets - 114 - - 114Prepayments and accrued income - 181 - - 181Cash and cash equivalents 3,939 - - - 3,939--------------------------------------------------------------------------------------------------------------------Assets - Policyholder assets 78,516 2,905 749 - 82,170==================================================================================================================== 95.6% 3.5% 0.9% 0.0% Policyholder assets are typically held in respect of unit linked liabilities and as such are principally invested in financial investments measured at fair value. Cost/ Equity Fair Value Amortised Cost Accounted Tax Assets Total £m £m £m £m £mAssets - Participating fund assetsGoodwill, Acquired value of in-force - - - - - business and intangible assetsInterests in joint ventures and associates - - 1,675 - 1,675Property and equipment 114 - - - 114Investment Property 7,818 - - - 7,818Loans 428 8,153 - - 8,581Financial investments Debt securities 61,549 - - - 61,549 Equity securities 22,826 - - - 22,826 Other investments 11,362 - - - 11,362Reinsurance assets - 999 - - 999Deferred tax assets - - - - -Current tax assets - - - - -Receivables and other financial assets - 2,206 - - 2,206Deferred acquisition costs and other assets - 292 - - 292Prepayments and accrued income - 1,263 - - 1,263Cash and cash equivalents 5,012 - - - 5,012--------------------------------------------------------------------------------------------------------------------Assets - Participating fund assets 109,109 12,913 1,675 - 123,697==================================================================================================================== 88.2% 10.4% 1.4% 0.0% In addition to Investment property and financial investments (both measured at fair value), Participating Fund assets include £8.2bn of loans held at amortised cost. ---------------------------------------------------------------------------------------------------------------------Page 108 Cost/ Equity Fair Value Amortised Cost Accounted Tax Assets Total £m £m £m £m £mAssets - Shareholder assetsGoodwill, Acquired value of in-force business and intangible assets - 6,279 - - 6,279Interests in joint ventures and associates - - 1,358 - 1,358Property and equipment 383 445 - - 828Investment Property 1,874 - - - 1,874Loans 17,797 9,468 - - 27,265Financial investments Debt securities 42,403 - - - 42,403 Equity securities 5,685 - - - 5,685 Other investments 2,767 - - - 2,767Reinsurance assets - 5,205 - - 5,205Deferred tax assets - - - 606 606Current tax assets - - - 376 376Receivables and other financial assets - 6,519 - - 6,519Deferred acquisition costs and other assets - 4,081 - - 4,081Prepayments and accrued income - 1,688 - - 1,688Cash and cash equivalents 6,919 - - - 6,919--------------------------------------------------------------------------------------------------------------------Assets - Shareholder assets 77,828 33,685 1,358 982 113,853==================================================================================================================== 68.4% 29.6% 1.2% 0.9% Over two thirds of shareholder assets are measured at fair value. The remaining assets include goodwill, loans, reinsurance assets and receivables, all carried at amortised cost but subject to regular impairment reviews. 5. Risk Management Framework - Market Risk Market risk is the risk of adverse financial impact due to changes in fair values or future cash flows of financial instruments from fluctuations in interest rates, equity prices, property prices and foreign currency exchangerates. Market risk arises in Aviva's operating businesses due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by the shareholders. The Group has established a policy on market risk which sets out the principles that businesses are expected to adopt in respect of management of the key market risks to which the Group is exposed. The Group monitors adherence to this market risk policy and regularly reviews how business units are managing these risks locally, through the Group Investment Committee, which reports to the Group Asset Liability Management Committee (ALCO). For each of the major components of market risk, described in more detail below, the Group has put in place additional policies and procedures to set out how each risk should be managed and monitored, and the approach to setting an appropriate risk appetite. The management of market risk is undertaken in both business units and at Group level. Business units manage market risks locally using their market risk framework and within local regulatory constraints. Business units may also beconstrained by the requirement to meet policyholders' reasonable expectations and to minimise or avoid market risk in a number of areas. The Group Investment Committee is responsible for managing market risk at Group level, and a number of investment related risks, in particular those faced by shareholder funds throughout the Group. The financial impact from changes in market risk (such as interest rates, equity prices and property values) is examined through stress tests adopted in the Individual Capital Assessments (ICA) and Financial Condition Reports (FCR), which consider the impact on capital from variations in financial circumstances on either a remote scenario, or to changes from the central operating scenario. Both consider the management actions that may be taken in mitigation of the change in circumstances. The sensitivity of Group earnings to changes in economic markets is regularly monitored through sensitivities to investment returns and asset values in EEV reporting. The Group market risk policy sets out the minimum principles and framework for matching liabilities with appropriate assets, the approaches to be taken when liabilities cannot be matched and the monitoring processes that are required.The Group has criteria for matching assets and liabilities for all classes of business to minimize the impact of mismatches between the value of assets and the liabilities due to market movements. The local regulatory environmentfor each business will also set the conditions under which assets and liabilities are to be matched. The Group writes unit-linked business in a number of its operations. In unit-linked business, the policyholder bearsthe investment risk on the assets held in the unit-linked funds, as the policy benefits are directly linked to thevalue of the assets in the fund. The shareholders' exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund. ---------------------------------------------------------------------------------------------------------------------Page 109 The risk management policies and procedures that the Group has put in place for each major component of market risk is as follows: •Equity price risk The Group is subject to equity price risk due to daily changes in the market values of its equity securities portfolio. The Group's shareholders are exposed to the following sources of equity risk: - direct equity shareholdings in shareholder funds and the Group defined benefit pension funds; - the indirect impact from changes in the value of equities held in policyholders' funds from which management charges or a share of performance are taken; and - its interest in the free estate of long-term funds. At business unit level, equity price risk is actively managed in order to mitigate anticipated unfavourable market movements where this lies outside the risk appetite of either the company in respect of shareholder assets or the fundin respect of policyholder assets concerned. In addition local asset admissibility regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities. Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of stochastic models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. The Investment Committee actively monitors equity assets owned directly by the Group, which may include some materialshareholdings in the Group's strategic business partners. Concentrations of specific equity holdings (e.g. the strategic holdings) are also monitored monthly by the Group Capital Management Committee. • Property price risk The Group is subject to property price risk due to holdings of investment properties in a variety of locations worldwide. Investment in property is managed at business unit level, and will be subject to local regulations onasset admissibility, liquidity requirements and the expectations of policyholders, as well as overall risk appetite. The Investment Committee also actively monitors property assets owned directly by the Group. At 31 December 2007, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. • Interest rate risk Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities, which are exposed to fluctuations in interest rates. Interest rate risk also exists in products sold by the group, in particular from policies that carry investment guarantees on early surrender or at maturity, where claim values can become higher than the value of backing assets when interest rates rise or fall. The Group manages this risk by adopting close asset liability matching criteria, to minimise the impact of mismatches between the value of assets and liabilities from interest rate movements. However, where any residual mismatch is within our risk appetite, the impact is monitored through economic capital measures such as ICA. On short-term business, such as general insurance business, the Group requires a close matching of assets and liabilities to minimise this risk. Interest rate risk is monitored and managed by the Group Investment Committee, and the Group's Asset Liability Management Committee. Exposure to interest rate risk is monitored through several measures that include Value-at-Risk analysis, position limits, scenario testing, stress testing and asset and liability matching using measures such as duration. Theimpact of exposure to sustained low interest rates is regularly monitored. Interest rate risk is also managed using a variety of derivative instruments, including futures, options, swaps, caps and floors, in order to provide a degree of hedging against unfavourable market movements in interest rates inherent in the assets backing technical liabilities. At 31 December 2007, the Group had entered into a number of interest rate swap agreements to mitigate the effects of potential adverse interest rate movements, and to enable close matching of assets and liabilities. • Currency risk The Group has minimal exposure to currency risk from financial instruments held by Business Units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profit contractliabilities. The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately half of the Group's premium income arises incurrencies other than sterling and the Group's net assets are denominated in a variety of currencies, of which the largest are euro, sterling, and US dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group's business and meet local regulatory and market requirements. ---------------------------------------------------------------------------------------------------------------------Page 110 The Group's foreign exchange policy requires that each of our subsidiaries maintains sufficient assets in its local currency to meet local currency liabilities. Therefore, capital held by the Group's business units should beable to support local business activities regardless of foreign currency movements. However, such movements may impactthe value of the Group's consolidated shareholders' equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. The Group's foreign exchange policy is to manage these exposures by aligning the deployment of capital by currency with the Group's capital requirements by currency. Limits are set to control the extent to which the deployment of capital is not aligned fully with the Group's capital requirement for each major currency. Currency borrowings and derivatives are used to manageexposures within the limits that have been set. • Derivatives risk Derivatives are used by a number of the larger businesses, within policy guidelines agreed by the Board of directors,as set out in the Group policy on derivatives use. Activity is overseen by the Group Derivatives Committee, whichmonitors implementation of the policy, exposure levels and approves large or complex transactions proposed by businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes or to structurespecific retail-savings products. Derivative transactions are covered by either cash or corresponding assets and liabilities. Speculative activity is prohibited, unless approval has been obtained from the Group Derivatives Committee. Over the counter derivative contracts are entered into only with approved counterparties, in accordance with our Group credit policies, thereby reducing the risk of credit loss. The Group also manages a number of hedge funds which use derivatives extensively within a defined derivative framework. The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice for the activity that is undertaken. • Correlation risk The Group recognises that identified lapse behaviour and potential increases in consumer expectations are sensitive to and interdependent with market movements and interest rates. These interdependencies are taken into consideration in the ICA in the aggregation of the financial stress tests with the operational risk assessment. FCRs also consider scenarios involving a number of correlated events. A number of policyholder participation features have an influence on the Group's interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. 6. Risk Management Framework - Credit Risk • Monitoring credit risk We have a significant exposure to credit risk through our investments in corporate bonds, commercial mortgages, and other securities. We hold these investments for the benefit of both our policyholders and shareholders. Credit risk is the risk of loss in the value of financial assets due to counterparties failing to meet all or part of their obligations. The Group risk management framework also includes the market related aspect of credit risk. This isthe risk of a fall in the value of fixed interest securities from changes in the perceived worthiness of the issuer and is manifested through changes in the fixed interest securities' credit spreads. The Group's management of credit risk includes monitoring exposures at a Group level and requiring individual operating businesses to implement local credit risk policies. The local business unit credit risk policies involve theestablishment and operation of specific risk management committees and the detailed reporting and monitoring of thefinancial asset portfolio against pre-established risk criteria. Large individual counterparty exposures exceeding£25 million are aggregated and monitored at Group level against centrally-set limits reflecting the credit ratings by companies such as Standard & Poor's. In addition, the Group evaluates the concentration of exposures by industry sectorand geographic region through the Group Credit Committee. • Credit ratings Financial assets are graded according to current credit ratings issued. AAA is the highest possible rating. Investmentgrade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside thisrange are classified as speculative grade. Credit limits for each counterparty are set based on default probabilitiesthat are in turn based on the rating of the counterparty concerned. • Credit concentration risk The long-term businesses and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations, applicable in most markets, limiting investments in individualassets and asset classes. In cases where the business is particularly exposed to credit risk (e.g. in respect of defaults on mortgages or debt matching annuity liabilities) this risk is translated into a more conservative discount rate used to value the liabilities, creating a greater capital requirement, and this credit risk is actively managed. The impact of aggregation of credit risk is monitored as described above. With the exception of Government Debt Securities the largest aggregated counterparty exposure is approximately 0.5% of the Group's total assets. • Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance marketand the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage itsreinsurance counterparty exposures, by limiting the reinsurers that may be used, and the impact from reinsurer defaultis measured regularly, in particular through the ICA tests, and is managed accordingly. Both the Group CreditCommittee and Group Reinsurance Security Committee have a monitoring role over this risk. ---------------------------------------------------------------------------------------------------------------------Page 111 The Group's largest reinsurance counterparty is National Indemnity Corporation, a member of the Berkshire Hathaway Group. At 31 December 2007 the reinsurance asset recoverable from National Indemnity Corporation was £1.1 billion. Thisexposure is monitored on a regular basis with the forecast to completion monitored for any shortfall in the claims history, to verify that the contract is progressing as expected and that no further exposure for the Group willarise. In the event of a catastrophic event, the counterparty exposure to a single reinsurer is estimated not to exceed 1.1% of shareholders' equity. • Unit-Linked business As discussed previously, in unit-linked business the policyholder bears the market risk, including credit risk, on investment assets in the unit funds, and the shareholders' exposure to credit risk is limited to the extent that theirincome arises from asset management charges based on the value of assets in the fund. • Impairment of financial assets Credit terms are set locally within overall credit limits prescribed by the Group Credit Committee and within the framework of the Group Credit Policy. The credit quality of financial assets is managed at the local business unitlevel. Where assets have been classed as "past due and impaired", an analysis is made of the risk of default and a decision is made whether to seek collateral from the counterparty. There were no material financial assets that would have been past due or impaired had the terms not been renegotiated. 7. Analysis of Asset Quality The following sections analyse the quality of various Group assets. The table below provides an overview of where additional information is provided. Cross Further No further Reference Analysis analysis Total £m £m £mAssetsGoodwill, Acquired value of in-force business and intangible assets 7.1 6,279 6,279Interests in joint ventures and associates 7.2 3,782 3,782Property and equipment 942 942Investment Property 7.3 15,077 15,077Loans 7.4 36,193 36,193Financial investments Debt securities 7.5.1 119,017 119,017 Equity securities 7.5.2 56,254 56,254 Other investments 7.5.3 40,413 40,413Reinsurance assets 7.6 8,109 8,109Deferred tax assets 606 606Current tax assets 376 376Receivables and other financial assets 7.7 9,183 9,183Deferred acquisition costs and other assets 4,487 4,487Prepayments and accrued income 3,132 3,132Cash and cash equivalents 7.8 15,870 15,870--------------------------------------------------------------------------------------------------------------------Total assets 310,177 9,543 319,720==================================================================================================================== 97.0% 3.0% As can be seen from the table, the analysis covers 97% of the Group's total assets. The remaining assets are not discussed further in the context of this disclosure on the basis that their value and quality will typically notfluctuate based on movements in the credit markets. Fair Value Hierarchy To provide further information on the valuation techniques used to measure assets carried at fair value, this disclosure categorises the measurement basis for assets carried at fair value into a 'fair value hierarchy' as follows: Quoted market prices in active markets - ('Level 1') Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. An active marketis a market in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Examples are listed equities in active markets, listed debt securities in active markets and quoted unit trusts in active markets. ---------------------------------------------------------------------------------------------------------------------Page 112 Valued using models with significant observable market parameters - ('Level 2') Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. If the asset has a specified (contractual) term, a Level 2 input must beobservable for substantially the full term of the asset. Level 2 inputs include the following: - Quoted prices for similar (i.e. not identical) assets in active markets; - Quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; - Inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, anddefault rates); and - Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means(market-corroborated inputs). Examples are securities measured using discounted cash flow models based on market observable swap yields, investment property measured using market observable information and listed debt or equity securities in a market that isinactive. Valued using models with significant unobservable market parameters - ('Level 3') Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measurefair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect the business unit's own assumptions about the inputs that market participants would use in pricing the asset. For example, certain private equity investments and private placements. 7.1. Goodwill, Acquired value of in-force business and intangible assets The Group's Goodwill, Acquired value of in-force business and the majority of other intangible assets have arisen from the Group's business combinations. These business combinations have included several bancassurance transactionswhich have resulted in £640 million of the total £3,082 million of Goodwill and £630 million of the total £1,408 million of other intangible assets which primarily represent the value of bancassurance distribution agreements acquired in these business combinations. As at 31 December 2007, the Group has assessed the value of these bancassurance related assets and has not identified a need to impair any of these amounts. 7.2. Interests in Joint Ventures and Associates Investments in Joint Ventures and Associates are accounted for using the equity method. Under this method, the cost of the investment in a given associate or joint venture, together with the Group's share of that entity's post-acquisitionchanges to shareholders' funds, is included as an asset in the consolidated balance sheet. The carrying value of both joint ventures and associates includes goodwill identified on their acquisition and any loans that Group companies haveadvanced to them. Some 89% of the carrying value of joint ventures comprises interests in property limited partnerships (PLPs) which are held in the UK and certain European long-term business policyholder and participating funds as part of their investment strategy. These funds have invested in a number of PLPs, either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its assets and liabilities have been consolidated within the appropriate balance sheet headings. Where the partnership is managed by a contractual agreement suchthat no party exerts control, notwithstanding that the Group's partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures and accounted for using the equity method described above. Where the Group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are carried at fair value through profit and loss within financialinvestments. The underlying assets of these PLPs are almost entirely investment property which are valued on the same basis as those held directly and shown in section 7.3 of this disclosure. The Group's principal associates are through two bancassurance investments with Royal Bank of Scotland Group (RBSG). Their assets are held for the benefit of their policyholders and, as described above, the Group equity accounts for itsshare of net assets and any goodwill on acquisition. The Group's investments in the RBSG companies have been tested for impairment by comparing their carrying values with their recoverable amounts, based on value-in-use calculations.The recoverable amounts exceed the carrying values of these investments, and a reasonably possible change to the key underlying assumptions will not cause the carrying values of the investments to exceed their recoverable amounts. We have also accounted for our recent investment in certain Dutch investment funds as associates because of the influence we have over the management of these funds. ---------------------------------------------------------------------------------------------------------------------Page 113 7.3. Investment Property Fair Value Hierarchy --------------------------- Level 1 Level 2 Level 3 Total £m £m £m £mInvestment Property - Total Leased to third parties under operating leases - 14,616 - 14,616Vacant Investment Property / Held for Capital Appreciation - 461 - 461--------------------------------------------------------------------------------------------------------------------Total Investment Property - 15,077 - 15,077==================================================================================================================== 0.0% 100.0% 0.0% Investment property assets are further analysed into Policyholder, Participating fund and Shareholder assets. Fair Value Hierarchy --------------------------- Level 1 Level 2 Level 3 Total £m £m £m £mInvestment Property - Policyholder assetsLeased to third parties under operating leases - 5,173 - 5,173Vacant Investment Property / Held for Capital Appreciation - 212 - 212--------------------------------------------------------------------------------------------------------------------Investment Property - Policyholder assets - 5,385 - 5,385==================================================================================================================== 0.0% 100.0% 0.0% Fair Value Hierarchy --------------------------- Level 1 Level 2 Level 3 Total £m £m £m £mInvestment Property - Participating Fund assetsLeased to third parties under operating leases - 7,647 - 7,647Vacant Investment Property / Held for Capital Appreciation - 171 - 171--------------------------------------------------------------------------------------------------------------------Investment Property - Participating Fund assets - 7,818 - 7,818==================================================================================================================== 0.0% 100.0% 0.0% Fair Value Hierarchy --------------------------- Level 1 Level 2 Level 3 Total £m £m £m £mInvestment Property - Shareholder assetsLeased to third parties under operating leases - 1,796 - 1,796Vacant Investment Property / Held for Capital Appreciation - 78 - 78--------------------------------------------------------------------------------------------------------------------Investment Property - Shareholder assets - 1,874 - 1,874==================================================================================================================== 0.0% 100.0% 0.0% Some 87% of investment properties by value are held in unit-linked or participating funds. Investment properties are stated at their market values as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations, all with recent relevant experience. Values are calculated using a discounted cash flow approachand are based on current rental income plus anticipated uplifts at the next rent review, assuming no future growth in rental income. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties. The basis of valuation therefore naturally falls to be classified as Level 2. Valuations are typically undertaken on a quarterly (and in some cases monthly) basis. Nearly 97% of investment properties by value are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation. 7.4. Loans The Group loan portfolio is principally made up of: - Policy loans which are generally collateralised by a lien or charge over the underlying policy; - Loans and advances to banks primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities; - Residential mortgage loans (securitised and non-securitised). Securitised mortgages are secured by non-recourse borrowings; - Non securitised commercial loans are primarily held by the UK Life Business to back annuity liabilities; and - Other loans which typically represent loans and advances to customers of our banking business. Loans with fixed maturities, including policy loans, mortgage loans (at amortised cost) and loans and advances to banks, are recognised when cash is advanced to borrowers. These loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. ---------------------------------------------------------------------------------------------------------------------Page 114 For certain mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present themortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they aremanaged together on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The carrying values of mortgages measured as fair value are estimated using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement. Fair Value Hierarchy --------------------------- Sub-Total Amortised Level 1 Level 2 Level 3 Fair Value Cost Total £m £m £m £m £m £mLoans - TotalPolicy loans - - - - 1,316 1,316Loans & Advances to Banks - - - - 7,576 7,576-----------------------------------------------------------------------------------------------------------------------Securitised mortgage loans - residential - 5,476 - 5,476 1,911 7,387Securitised mortgage loans - commercial - - - - - ------------------------------------------------------------------------------------------------------------------------Total securitised mortgage loans - 5,476 - 5,476 1,911 7,387----------------------------------------------------------------------------------------------------------------------Non-securitised mortgage loans - residential - 1,429 - 1,429 3,065 4,494Non-securitised mortgage loans - commercial - 11,420 - 11,420 1,682 13,102-----------------------------------------------------------------------------------------------------------------------Total non-securitised mortgage loans - 12,849 - 12,849 4,747 17,596Other Loans - - - - 2,318 2,318-----------------------------------------------------------------------------------------------------------------------Total Loans - 18,325 - 18,325 17,868 36,193======================================================================================================================= 0.0% 50.6% 0.0% 49.4% Fair Value Hierarchy --------------------------- Sub-Total Amortised Level 1 Level 2 Level 3 Fair Value Cost Total £m £m £m £m £m £mLoans - Policyholder assetsPolicy loans - - - - - -Loans & Advances to Banks - - - - 247 247-----------------------------------------------------------------------------------------------------------------------Securitised mortgage loans - residential - - - - - -Securitised mortgage loans - commercial - - - - - ------------------------------------------------------------------------------------------------------------------------Total securitised mortgage loans - - - - - ------------------------------------------------------------------------------------------------------------------------Non-securitised mortgage loans - residential - - - - - -Non-securitised mortgage loans - commercial - 100 - 100 - 100-----------------------------------------------------------------------------------------------------------------------Total non-securitised mortgage loans - 100 - 100 - 100Other Loans - - - - - ------------------------------------------------------------------------------------------------------------------------Loans - Policyholder assets - 100 - 100 247 347======================================================================================================================= 0.0% 28.8% 0.0% 71.2% Fair Value Hierarchy --------------------------- Sub-Total Amortised Level 1 Level 2 Level 3 Fair Value Cost Total £m £m £m £m £m £mLoans - Participating Fund assetsPolicy loans - - - - 1,014 1,014Loans & Advances to Banks - - - - 6,605 6,605-----------------------------------------------------------------------------------------------------------------------Securitised mortgage loans - residential - - - - - -Securitised mortgage loans - commercial - - - - - ------------------------------------------------------------------------------------------------------------------------Total securitised mortgage loans - - - - - ------------------------------------------------------------------------------------------------------------------------Non-securitised mortgage loans - residential - - - - 496 496Non-securitised mortgage loans - commercial - 428 - 428 19 447-----------------------------------------------------------------------------------------------------------------------Total non-securitised mortgage loans - 428 - 428 515 943Other Loans - - - - 19 19-----------------------------------------------------------------------------------------------------------------------Loans - Participating Fund assets - 428 - 428 8,153 8,581======================================================================================================================= 0.0% 5.0% 0.0% 95.0% Fair Value Hierarchy --------------------------- Sub-Total Amortised Level 1 Level 2 Level 3 Fair Value Cost Total £m £m £m £m £m £mLoans - Shareholder assetsPolicy loans - - - - 302 302Loans & Advances to Banks - - - - 724 724-----------------------------------------------------------------------------------------------------------------------Securitised mortgage loans - residential - 5,476 - 5,476 1,911 7,387Securitised mortgage loans - commercial - - - - - ------------------------------------------------------------------------------------------------------------------------Total securitised mortgage loans - 5,476 - 5,476 1,911 7,387-----------------------------------------------------------------------------------------------------------------------Non-securitised mortgage loans - residential - 1,429 - 1,429 2,569 3,998Non-securitised mortgage loans - commercial - 10,892 - 10,892 1,663 12,555-----------------------------------------------------------------------------------------------------------------------Total non-securitised mortgage loans - 12,321 - 12,321 4,232 16,553Other Loans - - - - 2,299 2,299-----------------------------------------------------------------------------------------------------------------------Loans - Shareholder assets - 17,797 - 17,797 9,468 27,265======================================================================================================================= 0.0% 65.3% 0.0% 34.7% ------------------------------------------------------------------------------------------------------------------------Page 115 Shareholder exposure to non-securitised mortgage loans is predominantly to commercial, rather than residential, mortgages. These are typically held to back annuity liabilities. Historical data has shown the portfolio to be of veryhigh quality, with minimal bad debts incurred on the large UK portfolio in the last 15 years. As there are no quoted prices, mortgages are valued on a Level 2 basis. Securitised mortgage loans above of £7.4 billion are secured through non-recourse borrowings in our UK Life and Dutch businesses. Loans to banks predominantly relate to loans of cash received as collateral in stock lending transactions. These loansare made to highly rated banking counterparties and are fully collateralised by other securities. Arrears Financial assets that are past due but not impaired --------------------------------------------------- Financial assets that Neither past due Greater than have been nor impaired 0-3months 3-6months 6months-1year 1 year impaired Total Total Loans 35,937 210 11 3 15 17 36,193====================================================================================================================== 99.3% 0.6% 0.0% 0.0% 0.0% 0.0%Policyholder assets 347 - - - - - 347Participating Fund assets 8,558 16 - - 7 - 8,581Shareholder assets 27,032 194 11 3 8 17 27,265----------------------------------------------------------------------------------------------------------------------Total Loans 35,937 210 11 3 15 17 36,193====================================================================================================================== The Group reviews the carrying value of loans at least at each reporting date. If the carrying value of a loan is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. Impairment is measured based on the present value of expected future cash flows discounted at the effective rate of interest of the loan, subject to the fair value of the underlying collateral. Reversals of impairments are only recognised where the decrease in the impairment can be objectively related to an event occurringafter the write-down (such as an improvement in the debtor's credit rating). The level of arrears is negligible in relation to the size of the portfolio. Loan to Value The following section provides an analysis of the loan to value of the securitised and non-securitised mortgage loans. LTV LTV LTV LTV LTV LTV >100% 95-100% 90-95% 80-90% 70-80% 100% 95-100% 90-95% 80-90% 70-80% 100% 95-100% 90-95% 80-90% 70-80% 100% 95-100% 90-95% 80-90% 70-80% 100% 95-100% 90-95% 80-90% 70-80%Related Shares:
Aviva